City of Dallas Owes $33+ Million for Drilling Permit Denials

City of Dallas Owes $33+ Million for Drilling Permit Denials

Co-author Trevor Lawhorn

If you have ever wondered how many ways a cocktail of stupidity*, treachery and feckless government can inflict financial harm on the undeserving, including the citizens the feckless government leaders are supposed to serve, see City of Dallas v. Trinity E. Energy, LLC.

 Facts

In 2008 during the Barnett Shale drilling boom, the City of Dallas issued an RFP to lease several thousand acres owned by the City. Trinity won the bid and agreed with the City that two additional tracts (the “Radio Tower Tract” and the “Gun Club Tract”) would be included in the lease, but only as drill site locations. Trinity paid a $19 million bonus for the lease.

Trinity submitted applications for special use permits (SUPs) from the City for the two tracts and a a private tract. The applications were filed correctly and in accordance with applicable laws. Pulling a Lucy on Trinity’s Charlie Brown, after a lengthy delay the City Plan Commission denied the applications. No other drill sites were feasible for various reasons. Trinity lost its appeal of the SUP denials to the city Council.

The City then amended its gas drilling ordinance to impose restrictions that effectively precluded drilling anywhere on the lease. The lease expired and the interest reverted to the City, never to be drilled.

Procedure

Trinity sued the City on several causes of action. The jury found the City committed statutory fraud and negligent misrepresentation and awarded damages to Trinity.

Over the City’s objection, the trial court submitted a jury question of the fair market value of Trinity’s property before and after denial of the SUPs. The jury found the FMV before denial was $33,639,000 and zero after. The trial court determined that the City committed a regulatory taking by failing to approve the SUPs and awarded Trinity $33,639,000.  The City appealed.

Regulatory taking

The Texas Constitution prohibits the taking, damaging or destroying of private property for public use without adequate compensation.  Inverse condemnation is a cause of action against a governmental defendant to recover the value of property which has been taken in fact by the governmental defendant, even though no formal exercise of the power of eminent domain has been attempted by the taking agency.  To plead a claim for inverse condemnation, the claimant must allege an intentional government act that resulted in the uncompensated taking of his property.

The City’s arguments:

  • There was insufficient evidence to support the finding that the City’s action constituted a regulatory taking. Trinity still had beneficial use of its property because it had other drill sites from which it could access some of the leased acreage. Trinity produced evidence that the best way to maximize the value of its interest was to use the three tracts as drill sites. This was why the sites were included in the lease.
  • Trinity could have drilled on other tracts in Irving and Farmers Branch to access its acreage. The City produced no evidence that those drill sites provided reasonable or economically viable access to Trinity’s minerals. Trinity showed that those sites would require complex drilling and excessively long well bores.
  • Trinity could have sought SUPs for different sites. But there was no evidence that Trinity would have been able to obtain SUPs for other sites that would have permitted Trinity to reasonably and economically develop its interests.

 The court of appeals affirmed the judgment.

 Sufficiency of expert testimony

 The City argued that Trinity’s expert’s testimony on market value was unreliable and therefore the evidence was insufficient to support the jury’s findings. In short, the court found that the expert’s testimony regarding value using the “proposed units” method was sufficient.

 The court also found that the expert’s use of the “comparable sales” method was sufficient. Testimony regarding comparable sales from other counties was appropriate because those sales included acreage with similar thickness as the City acreage. Comparable sales need not be in the immediate vicinity of the subject land, so long as they meet the similarity test.

Finally, the court found that the expert’s “discounted cash-flow” analysis was sufficiently certain. The expert relied on estimated future production, future prices, and estimated costs of production to calculate the net income for the property. He used publicly available price forecasts for his calculations.  While there was conflicting evidence regarding whether Trinity’s interests would be productive, resolving those conflicts was for the jury.

Your musical interlude.

* This is an opinion of course. We can’t certify that the then-City Council members who voted against granting the SUPs have IQ’s of two digits. Maybe they were driven by misinformed and misplaced ideology. Either way, $36 Million would fill a lot of potholes in South Dallas. Can’t blame Mayor Rawlings; he warned them.

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